A few years back, agricultural chemical companies were all the rage. From June 2007 to June 2008, ag industry icon Potash (POT) more than tripled from $75 a share to over $230 a share. Seed giant Monsanto (MON) saw shares double from under $60 to over $130 in the same period. Others like Mosaic (MOS), Agrium (AGU), CF Industries and Terra Industries (TRA) saw huge gains of their own.
After the financial crisis, however, these fertilizer and agricultural chemical companies are pretty much right back where they started three years ago. That has produced a bit of a quandary for Wall Street. On one hand, some investors are thinking they can get in on the ground floor of the next ag boom now that prices have rolled back. Others who were burned as the sector went up in smoke are convinced that there’s a phantom premium in these ag stocks no different than what many of the Internet and tech stocks had in 2002 and 2003 after the bubble burst. These folks think ag stocks were so grossly overvalued that the bar is still set too high even if share prices have been slashed in half.
So what’s the story with these ag stocks? Let’s take a look:
Potash Corp. of Saskatchewan (POT) is one of the poster children for the ag frenzy a few years ago. As a weak dollar drove up corn prices to a 12-year high in 2008, farmers snatched up agricultural products boost their crop yield. As the leading provider of potassium-based fertilizer, POT saw booming sales and profits — and then the bottom fell out in the wake of the financial crisis. POT has seen its numbers gutted in the last several quarters, most recently in January when it reported that fourth-quarter earnings fell almost 70 percent over last year due to sharp price declines in crop nutrients. But before you think this is the bottom for Potash Corp., consider that the stock is still trading at a P/E of around 35. This company’s shares may have fallen from their peak but clearly haven’t found a proper valuation yet. For that reason, most analysts have a current price target for Potash that’s around or below its current level of $115 a share. The outlier on the downside? A mere $85 a share — over 25% under current levels.
Mosaic (MOS) is another phosphate fertilizer producer that crashed and burned in late 2008 and struggled in 2009. The company has not only seen profits dwindle, but has fallen short of earnings per share forecasts in three of the last four quarters — most recently in the beginning of January with a gut-wrenching 89% drop in profits year-over-year. The company was downgraded to “Hold” by Standpoint Research several weeks ago, and the consensus price target for MOS stock is around $67. That’s just a hair above current levels.
Seed giant Monsanto (MON) has seen a similar run, but appears to be doing much batter lately. This “frankenseed” company is a leader in bioengineered crops, among other ag products. When it reported first-quarter earnings in 2008, it boasted profits that were nearly triple the previous year. In its first earnings report of 2010, however, the company failed to even break even. Unlike Potash, which continues to flop, some agricultural industry analysts are predicting that this is the bottom for MON shares. In the last month, the company has seen 18 expert recommendations on Wall Street — with four being “buy” and four more being “strong buy” and the average target price over $90. That’s a 20% jump above current valuations of $75. Still, with a P/E pushing 30, there may still be a premium baked into shares.
Perhaps the biggest unknown in the ag sector in 2010 is the merger war over the small-cap fertilizer company Terra Industries (TRA). With a market size of around $5 billion, the company is big enough to offer a great addition to larger competitors but small enough to be digestible in this tough climate for the industry. Just a few days ago, CF Industries (CF) unveiled a new $4.7 billion offer for Terra, making its second run at the rival. This time around, CF is fighting off Norway-based Yara International but was previously was involved in a bidding war with Agrium (AGU). CF’s latest deal is worth $4.7 billion — $3.7 billion cash, which could be very attractive to the shareholders who took a dive with TRA stock in the past few years, and $1 billion in CF stock. Terra accepted a $4.1 billion offer from Yara just last month.
Oh, and for the record — Agrium (AGU) still has a separate hostile offer in the works to buyout Terra.
It’s difficult to put a fair target on any of these companies involved in buyout negotiations, but the consensus seems to be that all are fairly valued for the time being without much up or downside potential. The consensus estimate for Agrium (AGU) among Wall Street brokers is around $70 a share and it’s trading a bit lower at around $67. The consensus for Terra (TRA) is around $41 and it’s trading a bit higher around $45. The consensus for CF Industries (CF) is just north of $100 a share and its trading around $106.
